Q3 2020 Phillips 66 Earnings Call
Welcome to the third quarter 2020, Phillips 66 earnings conference call.
My name is David and I will be your operator for today's call.
At this time all participants are in a listen only mode.
We will conduct a question and answer session.
Please note that this conference is being recorded.
I will now turn the call over to Jeff Dietert, Vice President Investor Relations you may begin.
Good morning, and welcome to the Phillips 66 third quarter earnings Conference call participants on today's call will include Greg Garland, Chairman and CEO, Kevin Mitchell SVP and CFO.
Bob Herman E V P refining right.
Brian Mendell, he VP marketing and commercial and Tim Roberts, he VP of midstream.
Today's presentation material can be found on the Investor Relations section of the Phillips 66 website.
Long with supplemental financial and operating information.
Slide two contains our safe Harbor statement, we will be making forward looking statements during the presentation in our Q and a session.
Actual results may differ materially from todays comments.
Factors that could cause actual results to differ included here as well as in our MCC filings with that I'll turn the call over to Greg Garland for opening remarks.
Okay, Thanks, Jeff and good morning, everyone and thank you for joining us today.
Our diversified integrated portfolio strong balance sheet and disciplined capital allocation enable us to navigate through this challenging market environment.
In the third quarter we.
We delivered improved results in our midstream chemicals marketing businesses.
When adjusted loss of $1 million or one cents per share and generated $795 million of operating cash flow excluding working capital.
We're proud of our employees and how they continue to step up to the challenges of 2020 clean the pandemic West coast buyers Gulf Coast Hurricanes.
Most recently our people responded the storms by helping their families their neighbors and safeguarding our assets.
Our employees commitment to operating excellence, our facilities are secured and sustain minimal damage.
Our company is provided $7 million in assistance to our employees and contributions to communities across the Gulf Coast Delta those affected by the storms.
Our employees continue to execute our strategy with an unwavering focus on operating excellence and what its been a very uncertain and challenging environment.
Our year to date safety results for exceeding last years industry, leading performance. Despite the current challenges.
Every day, we strive towards zero incident zero accident workplace and to keep our people healthy and safe.
In the third quarter, we returned $393 million to our shareholders through dividends.
We remain committed to a secure competitive and growing dividend.
Since we formed the company, we returned over $27 billion to shareholders through dividends share repurchases and exchanges.
In the near term our focus is on touring the financial and operational strength of our company.
Overcoming this period of market weakness.
We expect to exceed the $500 million in cost reductions and the $700 million and consolidate capital spending reductions announced earlier this year.
We will continue to maintain disciplined capital allocation with a focus on long term value creation for our shareholders.
We're executing our growth strategy and achieved a major milestone with completion the sweeny hub phase two expansion.
We completed the two new 150000 barrel day Fractionators at this when you have we're gonna sites total fractionation capacity to 400000 barrels per day.
Right to reach full rates in September and Frac three started operations in October.
Both fractionators have operated at rates exceeding design capacity.
Fractionators are supported by long term customer commitments.
Phillips 66 partners continued construction on the CTG pipeline connecting its clemens storage caverns to petrochemical facilities in the Corpus Christi area.
The project is backed by long term commitments and expected to be completed in mid 2021.
At the South, Texas Gateway terminal, the first stock and 5.1 million barrels of storage capacity have been commissioned terminal.
Terminal operations are expected to ramp up through the end of this year as additional phases of construction are finished.
We expect the project to be completed in the first quarter of 2021, but the total storage capacity of 8.6 million barrels and up to 800000 barrels per day of export capacity.
66 partners was 25% interest in the terminal.
As we wrap up our major projects and execution. This year, we expect that total capital spending for 2021 will be $2 billion or less.
We look forward to sharing the details of our 2021 capital program with you in December final approval of our board.
Phillips 66 recognizes the climate challenge and it's making investments competitively positioned the company for more carbon future.
Recently, we announced plans to reconfigure, our San Francisco refinery and Rodado, California into the world's largest renewable fuels facility to meet the growing demand for renewable energy.
The plant will no longer produce fuels from crude oil, but instead will have the flexibility Ryan used cooking oil fats and greases and other feedstocks.
On completion in early 2020 for the facility will have over 50000 barrels per day or 800 million gallons per year of renewable fuel production capacity.
This capital efficient investment is expected to deliver strong returns.
The conversion is expected to reduce the plants greenhouse gas emissions by 50% and help California meet its low carbon objectives.
Earlier this month CP Chem announced its first commercial scale production of polyethylene from recycled mixed waste plastics. This development is an important milestone further demonstrating CV team's commitment to proactively help a world find sustainable solutions, including elimination of plastics waste in that environment.
We have a dual challenge of providing affordable abundant reliable energy to the world and also addressing the global climate Challenge. Our company is committed at both while continuing to deliver shareholder returns so with that I'll turn the call over to Kevin to review the financials. Thank.
Thank you, Greg Hello, everyone, starting with an overview on slide four we summarize our financial results.
We reported a third quarter loss of $799 million.
We have special items amounting to an after tax loss of $798 million, including impairments related to the planned conversion of the San Francisco refinery to a renewable cues facility as well as the cancellation of the Red Oak pipeline project.
Excluding special items, we had an adjusted loss of $1 million or one cents per share.
Operating cash flow was $795 million, excluding working cap.
Adjusted capital spending for the quarter was $549 million, including $347 million for growth projects.
We returned $393 million to shareholders through dividends.
Moving to slide five this.
This slide shows the change in adjusted results from the second quarter to the third quarter, an improvement of $323 million.
Adjusted pre tax results across all segments were improved except refining.
The income tax benefit was mainly driven by bonus depreciation on assets recently completed.
Ability under that cares act to carry back net operating losses to previous periods.
Slide six shows our midstream results.
Third quarter adjusted pre tax income was $354 million, an increase of $109 million from the previous quarter.
Transportation adjusted pre tax income was $202 million up $72 million from the previous quarter.
The increase was due to higher pipeline and terminal volumes supported by recovering demand.
Third quarter results reflect a ramp up of volumes on the group pipeline and the startup South Texas Gateway terminal.
NGL another delivered adjusted pre tax income of $102 million.
The $19 million increase from the prior quarter was due to higher sweeny hub volumes and inventory impacts.
At the Sweeny hub, the Freeport LPG export facility averaged 12 cars per month and Frac, one averaged 120000 barrels per day.
DCP midstream adjusted pre tax income of $50 million was up $18 million from the previous quarter, reflecting hedging impacts.
Turning to chemicals on slide seven.
Third quarter adjusted pre tax income was $132 million up $43 million from the second quarter.
Opens and Polyolefins adjusted pretax income was $148 million.
The $42 million increase from the previous quarter is due to higher polyethylene margins driven by improved sales prices, partially offset by lower polyethylene volumes and higher operating costs.
Global I wouldn't be utilization was 94%, reflecting downtime at U.S. Gulf coast facilities.
CP Chem proactively shutting facilities in preparation for the storms that made landfall in the third quarter.
Facility sustained minimal damage and have returned to normal operations.
Adjusted pre tax income for CNS decreased $6 million, primarily due to lower margins, partially offset by higher volumes.
During the third quarter, we received $112 million in cash distributions from CP Chem.
Turning to refining on slide eight.
Refining third quarter adjusted pre tax loss was $970 million down from an adjusted pre tax loss of $867 million last quarter.
The decrease was due to lower realized margins, partially offset by higher volumes.
Realized margins for the quarter decreased by 32% to $1.78 cents per barrel.
The decrease reflects a tightening crude spreads and the absence of the steep contango market structure experienced in the second quarter.
In addition, secondary product margins were lower due to rising crude prices.
Good utilization was 77% compared with 75% last quarter.
Improved utilization reflect increased refining runs in the central corridor and west coast regions, partially offset by downtime at Gulf Coast refineries.
We shut the Lake Charles refinery in late August and the Alliance refinery in mid September and preparation for Hurricanes, Laura and Sally.
Lake Charles downtime was extended due to third party power supply issues following hurricane Laura and restart was further delayed by Hurricane Delta.
Lake Charles refinery safely resumed operations and alliance remains band for planned turnaround activity.
Pretax turnaround costs were $41 million in line in line with the prior quarter, the third quarter clean product yield was 85%.
Slide nine covers market capture.
The three to one market crack for the third quarter was $8 or 17 cents per barrel compared to $7.47 per barrel in the second quarter we.
Realized margin was $1.78 cents per barrel and resulted in an overall market capture of 22%.
Market capture in the previous quarter was 35%.
Market capture is impacted by refinery configuration.
We make less gasoline and more distillate than premised in the three to one market crack.
During the quarter the distillate crack decreased to those 46 cents per barrel the gasoline crack improved $2 to 27 cents per barrel.
Losses from secondary products of $1.80 cents per barrel increased 85 cents per barrel from the previous quarter due to rising crude prices.
Loss losses from feedstock were 35 cents per barrel compared with 67 cents per barrel last quarter.
The other category reduced realized margins by $2.77 per barrel. This.
This category includes Rins freight costs lean product realizations and inventory impacts.
Moving to marketing and specialties on slide 10.
Adjusted third quarter pre tax income was $417 million $124 million higher than the second quarter.
Marketing and other increased $107 million due to higher margins and volumes.
Marketing business captured strong margins during the quarter and benefited from recovering demand.
Specialties increased $17 million due to higher finished lubricants volumes.
We reimaged 284 domestic branded sites during the third quarter, bringing the total to approximately 5000 since the start of the program.
In our international marketing business, we Reimaged 31 European sites, bringing the total to 143 since the program's inception.
Refined product exports in the third quarter were 139000 barrels per day, a decrease from the prior quarter.
On slide 11, the corporate and other segment had adjusted pretax costs of $213 million, a decrease of $11 million from the prior quarter.
The improvement is primarily due to lower employee related expenses, partially offset by higher net interest expense.
Slide 12 shows the change in cash for the quarter.
We started the quarter with $1.9 billion in cash on our balance sheet cash.
Cash from operations was $795 million, excluding working capital.
It was a working capital use of $304 million driven by an increase in tax receivables.
Our net debt issuances were $70 million.
Adjusted capital spending was $549 million.
We expect full year 2020, adjusted capital to be approximately $2.9 billion.
We returned $392 million to shareholders through dividends are.
Our ending cash balance was $1.5 billion.
We remain focused on conserving cash and maintaining strong liquidity in the current environment.
At September Thirtyth, we had $7 billion of committed liquidity.
Collective, reflecting $1.5 billion of cash plus available capacity on our credit facilities of $5 billion at Phillips 66, and a half a million dollars and Phillips 66 partners.
This concludes my review of the financial and operating results next I'll cover a few outlook items and.
In chemicals, we expect the fourth quarter global I won't be utilization rate to be in the mid nineties.
In refining crude utilization will be adjusted according to market conditions.
In October utilization has been in the mid 60% range impacted by downtime at the Lake Charles and the Lions refineries we.
We expect fourth quarter pre tax turnaround expenses to be between 80 and $100 million, we anticipate fourth quarter corporate and other costs come in between 220 $230 million pretax.
With that we'll now open the line for questions.
Thank you we will now begin the question and answer session.
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Your first question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.
Thanks, So much guys and good morning.
My opening question is around <unk> around the balance sheet and the dividend.
The outlook from here I think the message today is that you guys view the dividend as sustainable but can you just talk to that and then can you also just give us some flavor maybe that's for Kevin about conversations with the ratings agencies about about credit and how do you feel about where your balance sheet position is right now.
Let me take the first part and Kevin take the second I think you know I mean first of all when things I've learned is you never say never right in this business, but all the actions that we've taken to date cutting our cost cutting our capex increase in our liquidity has been around defending the dividend and.
As you look at Q3 essentially.
We covered our capex and our dividend through through cash certainly we feel comfortable as we if things don't get any better and we stay kind of where we're at and we feel really comfortable that our first dollar is going to go sustaining capital. It's a billion our $2nd can go the dividend a billion six that we can cover sustaining capex and our dividend from.
Our from our cash I think thats one of the great strengths.
The PX axa portfolio in a diversified.
Nature of our portfolio, so I'll, let Kevin talk little bit about the balance sheet and expectations there, yes. So.
We've consistently expressed our objective to maintain a strong balance sheet keep that financial flexibility and that's reflected in our credit ratings athree at Moody's and Triple B plus S&P as you would expect this year with a couple of debt issuances that we've done we've had plenty of opportunity to have conversations with the rating agencies.
Those have gone well our ratings have.
Stayed where they are in fact, we've had no actions and we still have a stable outlook on the current rating. So we feel good about that.
In the event that we need to.
Go to the balance sheet.
We feel pretty comfortable that we still have decent capacity without having a detrimental impact on the overall health of the balance sheet. So you think from a long term standpoint, our objective is to have a solid investment grade credit rating and were clearly there at this point.
We've added some that we've also talked about 30% debt to capital ratio, we're above that right now.
I think as we come through this current situation than we were able to get that back down we.
We'd anticipate the over time, we'd like to see ourselves back in the writing about that range, but we've always said thats not an absolute target. The real objective is to maintain a solid investment grade credit ratings and what comfortably there and we feel good that we can stay there.
Great and a follow up is just around marketing it was a strong quarter. There just any flavor in terms of what drove the outperformance in real time, what are you seeing for demand in the markets that you serve.
Oh, Thanks, Neil Yes, we were very happy with the marketing earnings in Q3 versus Q2, we were up 40% on margins in the us and 16% on volume overseas, we were up 23% on margins and volumes as well I think a number of things. If you look at our Q2 underlying commodity flat price.
Im off hard in April than was May and June and as you know flat prices inversely correlated to marketing margins. So that helped our margins.
A good bit also the volumes of course were up in Q3 versus Q2 wouldn't cobot, which was more fierce during or the Q2 time period.
Currently we're seeing gasoline off about 10% in the us and when we talk to our large large truck stop customers they say that until.
Until recently diesel demand was back up to our pre koby levels, but they've started to see it come off a bit 3%, 4% type levels overseas, we were back up to a 100% of demand Pico good levels.
Currently with Lockdowns tightening just a bit we're seeing those those levels come off just a few percentage points, but kind of happy where where we've gotten to from from the lows in early Q2.
One thing I might add.
We've seen strength on the West coast Port of L.A. Port.
It's up 13% year on year, and we're actually seeing PADD five diesel demand up year on year, So some strength, especially on the west coast.
Phil Gresh from JP Morgan. Please go ahead your line is open.
Yes, hi, good afternoon.
Just to start the question on refining here.
Some of your peers are.
Acknowledging that the U.S. industry needs to close a million barrels a day of capacity in order to balance the market you guys have obviously taken some action here with her day out.
I'm curious how you think about the U.S. refining industry, the amount of capacity that needs to close and with respect to.
The existing system as it stands and where utilization is how do you think about.
On your individual refineries and whether it makes sense to have a temporary idling or permanent idling at some point for another refinery. Thank you.
And as Bob I think we would agree there needs to continue to be some rationalization between the us and the European.
Refining system, and but specifically in the U.S. right dead refineries kind of run the gamut between really strong and and there are some maybe some weaker assets out there, but fundamentally the U.S. refining system is the most complex.
Lowest cost refining system with the exception of maybe a couple of big assets in the Middle East. So I think you know as as demand rationalises overtime to us is really positioned to be a strong player you will see.
Some export activity that will rise over time.
Latin America, and South America.
Into West Africa, but the U.S. really does stand to take up that mantle as we go forward, having said that there will be assets that will continue to rationalize out of this and you've seen that on both the east coast and the West coast and and no doubt some of the maybe landmark players as time goes on here, we'll have have difficulties as.
Crude diffs remain squeezed in the U.S. and that Jeff.
Jeff you got some numbers on closure so far yeah, we've been tracking announced refinery closures in in fact, we've had to revise it three times. This week I think we're up to almost 2 million barrels a day of announced closures globally.
Theres another 700000 barrels a day temporary closures and then another 700000 barrels a day of refineries that have talked about potential of converting into terminals or other activity. So three to three and a half million barrels a day globally. It's.
It's kind of split regionally.
With equal parts of Us Europe and Asia.
Weve, even seen an Australia refinery, that's been announced closures earlier today.
As you listen to many of the integrated oil companies they've made comments on planning further to further reduce their exposure in the downstream on.
So we are moving rapidly through rationalization.
I think you know as we've watched diesel inventories come off really hard over the last few weeks here I think thats a little bit a light at the end of the tunnel for margins to improve and with margins improving utilization will come back.
As the market dictates, but until that that kind of happens I don't think we'll see it the growth in GDP numbers last week I think are really good bellwether that says diesel demand should continue to strengthen into the winter and the normal cold season, and the burning of heating oil in the north is going to be a help so.
I think we might be in.
Physician to try to little water here for a couple of months, but I think its setting ourselves up that as we get to spring and look forward into next year's gasoline season that we do have a real chance of returning to a lot more normalcy in the margin structure and then utilization.
Okay, great. Thank you for all of that just to follow up on your own.
Refining performance here in the quarter.
And the pace of the margin normalization, how do you think about.
I guess the capture rates that you've been seeing this quarter and last quarter's obviously hurricane effects seven you called out a number of factors and the other buckets that were headwinds here in the quarter. So how do you think about.
The sensitivity of capture rates to the overall margin profile and.
As we move forward, if margins get better it captures get better and things like that versus.
Maybe some one off items that may have happened in the quarter.
Yes, Neal I think.
The way I look at the capture rate is when you've got cracks that are down in the six to $8 range right. Those are that part is kind of covering your cost and then.
Crude diffs are really as a refining system, where we make our money and when we haven't we've seen very tight crude diffs on just about every flavor crude.
Across our system. So it's hard to get much crack expansion there. The other thing that plays into it to when you're at low utilization and low.
Cracks kind of the fixed part of the barrel, which is the the 11 or 12% that we don't turn into clean product.
That kind of a two dollar offset that you see on those margins is a lot bigger deal at an eight dollar margin and it wasn't a 15 dollar margins so that.
Those two factors for me really coming in and.
And kind of cap down that that margin capture ability.
Roger read from Wells Fargo. Please go ahead your line is open.
Yes, thanks, good morning.
Just wanted to maybe like change the direction, a little bit from refining to the midstream Greg probably a question for you, but one of the Pushbacks. We get is with MPS changing behavior, maybe a little less production growth in coming years, you've built out a lot in the midstream can you kind of characterize for us how.
Midstream should perform and it may be more static for the production growth market.
What your exposure would be to any sort of.
Let's say reprice on tariffs or export.
Fees and so forth.
Okay, Tim I'll, let you take that yes.
Roger on that or a couple of things when you look at our portfolio. Specifically is that we have been in earnest trying to develop nbcs and make sure we get commitments. So those have been very important for us from our long term commitment and Dcs with good counterparties.
Thats, great. So thats been very helpful for our portfolio, especially on the third parties, but then also known as the sponsors.
We have quite a bit of exposure with regard to CSX. So that helps to also shore up some of our earnings volatility.
But also I just fundamental basis, we do see that there will be facing growth granted everyone's stay as uncertainty and what's going on out there and they are retrenching a bit but we still think there is going to be a call on Dan shale with regard to global demand.
To support growth in that area over the next couple of years.
And the other part I would say just when you look at our portfolio specifically, it's just really that we really participate in crude side. We're also got a good waiting with regard to the NGL space as well, which actually during this time has been rather resilient and supporting chemicals global convertibles.
Demand growth risk.
Risk and then subsequently also.
The motor fuel as well.
Yes, I think the.
No.
The average term across our portfolio is probably eight ish years.
And so we've got some time to ride through this I do agree that the next one to three year period, presumably fewer investible opportunities in midstream and this kind of more of a run well and optimize business for many people I think you'll see some consolidation midstream now over the next couple of years and so I think that the model going forward.
Next couple of years is to me a little bit different than model, we've executed over the last five years and.
The other thing I would say is somewhere around 80% probably across the portfolio is under Mbcs and so we think we're really.
Set up well to ride through these next couple of years from a midstream business and still deliver great performance in our midstream business.
Great. Thanks, and just a follow up Kevin for you with the working capital related to.
The tax adjustment can you kind of walk us through.
Working capital expectations into the into the end of the year typically I think Philips gets a pretty big pull on working capital and then Paul.
Part on the tax when would you expect to recover the actual tax receivable there.
Yes, okay. So on the tax cuts.
Component.
As you see on the financial statement, a significant tax benefit on the on the income statement, but thats not turning into cash in the current year, that's flowing through the receivable on a year to date basis, we've increased our tax receivable by 1.2 $1.3 billion year to date.
And that we would anticipate collecting next year post completion of our Twentytwenty tax return and so we would expect that to turn into cash so.
Sometime in the second quarter of next year.
From a broader working capital expectation going into the third quarter, you're going to see.
Two dynamics going on one is to the extent that the current operating room environment stays as it's been which it appears to be than from a tax standpoint, you'd still expect to be generating losses, and so you'll have that negative effect on working capital, but we typically have a an inventory draw.
In the fourth quarter, and we anticipate that happening again this year and so that will generate some positive cash from a working capital perspective.
Okay from Bank of America. Please go ahead your line is open.
Thank you good and good morning, everybody and I hope, you're all doing well there Greg.
Greg I Wonder if I could just pick up on the comment you made there about a slightly different business model for the midstream than we've seen in the last five years. So I wonder if I could ask you to elaborate on that with specific focus on your ownership structure of PS XP.
Well I think that I mean first of all I think that the upstream into the base of drilling upstream will determine the pace of opportunities and midstream for any future growth Doug. So we've talked about that a lot as.
So, we'll we'll see I suspect we're in a period of.
Uh huh.
Stronger capital discipline from the upstream players mode of returning more capital to shareholders, which will by definition, probably slow slow the growth of upstream.
And Conversely that will limit the investible opportunities in midstream. So we recognize that we are supportive of that we think thats the right thing for the energy space long term.
Our country for PS XP four it's a it's still highlights the value of our midstream business and we like that.
No I think that it's it's a model that we will continue to move forward we.
Evaluate alternative scenarios for PS XP, just like we do for any other asset in our portfolio as we move forward, but at this point in time, we still like the MLP structure I think we would all acknowledge that the lifecycle of an MLP is probably been shortened versus what it was maybe five years ago or six years ago.
No Kevin or Tim you want to add anything to that I think you covered it.
Okay, I'd want to elaborate too much on that but when you see it trending with 15% yield Greg would it make sense to buy that and at some point.
Yes, I think well you know.
For Pieris XP certainly.
I would say, we're not happy with where the units are trading and we look at that 15% yield and and scrap.
Scratch your head a little bit, but I also think that PS xps, but has that dapple overhang.
And I think that if you look at where the units are trading today I think most people priced in a complete shutdown of the Apple App.
And so we're not there.
But thats in the hands of someone else and a judge that hopefully I guess year end or early next year, we'll get a determination on that so no Tim or Jeff you want to add anything to that but is that the overhang is what we're looking at right now.
That's right.
Hi, Thanks, Thanks, guys, what my follow up is.
Kind of a broad question.
Which one of you guys wants to answer this but we've got an election in three or four days in case you weren't aware.
But what do you see as the principal risks to your business, whether it be tax would it be regulation, whether it be something like DAPL seems a quick summary, as to how you're preparing for a potential.
The change in administration.
Well.
First of all for clarity none of us want to answer that question.
[laughter], So I guess, that's all for me.
Yes, let me answer it so I think in the Triple the scenario. There is there is no question that.
No.
From a regulatory standpoint, it's going to be a tougher environment for all kinds of infrastructure, but energy in particular, our base case views is probably something more like we saw in eight years under the Obama Biden administration.
We've seen for both the last four years I do think that infrastructure is going to be harder to permit the pipelines in particular will be harder to permit you could make a case that the existing pipes, probably worth more in the ground.
Under that kind of scenario I think without question that corporate taxes are going to go up.
In that scenario, which by the way should help the MLP structure and just in terms of relative cost of capital versus a C Corp. So we're looking at that and.
Yes.
We'll see where we end up on on climate in climate solutions by I think that the odds are probably higher that you have some sort of cost of carbon that emerges with time.
In a triple b scenario versus the status quo. So that's kind of how we're thinking about it holistically and kind of the impacts to our business, Jeff I don't know if you want to anything 12, then okay.
Paul Cheng from Scotia Bank. Please go ahead your line is open.
Thank you hi, good morning, guys.
Yeah.
Greg if I can follow up on that but.
When you get to Europe, with a new time mcnall going to capital on the most I think that Pos very soon.
How are you looking at you will often European how.
What what's the content are unique to fundamentally change how you operate the refining and also the retail operation.
Hence.
Second question.
Paul Paul I'm, sorry, I missed the first part of that question.
Okay.
As part of that with the they grew up can you go into both the chronic low how is that it's going to change your operation and what are you thinking paying for your European assets.
What is it that you need to fundamentally change the way how you operate or that I mean do you have any deal.
Got the new conduct roll out.
How close outs it should be.
So thats the first question.
The second question is somewhat related.
Your logic cuts on Europe, they all coming on the platform MAU and the transition plan.
And if we assume that that's a biden administration as Doug had asked the question.
So that's kind of 66 to Paul Miller, a formal and the team transition and then is that the spread in wall.
Some form of diversifying.
Into the business line logic has and they all gotten into that.
As we move forward open yes, Chesapeake power pits, so yes, that's something.
You guys will be interest that or that you are saying you know what this if I miss not for us.
So I'll take a stab at that party I mean first of all there's aspirationally goals out there and there's probably reality and what can actually be accomplished during that timeframe and so I think our view is that.
Fossil fuels on both in transportation.
Power generation are going to be around for quite a long time multiple decades.
Doesn't mean, there's not more that we can do in terms of energy transition obviously for us to the.
The things that are nearest to us flight renewable diesel those kind of opportunities where you see us starting to move in those areas by the way included in Rodale. We're looking it may take carbon capture we're looking at.
Solar Inc.
In conjunction with that project. So I think you'll see you'll see us move in those areas. We are starting to add hydrogen fueling stations in Europe with our partner co op in Switzerland, We're part of the Gigacenter consortium and the United Kingdom, which is essentially green hydrogen we have offshore wind.
Crosses producing hydrogen be consumed in the industrial base in the Humberside area and so I think we continue to study and look at that we think hydrogen is really multiple decades away from big steps forward in terms of transportation fuel a lot of its technology. Its cost you know the greenhill.
Hydrogen is probably five to seven times more than the steam reforming of methane and so I think that theres some opportunities there.
We continue to work our battery technology were working on next generation batteries in our research and development.
Solid oxide fuel cell development also in our research and development areas and so we've got quite a bit going on in terms of energy transition within the portfolio.
But the nearest easiest steps first take are really to move towards lower carbon intensity fuels like the projects at Rodado like rise.
Also we're we're a humber, we're making about 1000 barrels a day of renewable diesel going about four to 5000 barrels a day here. Shortly we've got a project San Francisco actually comes on I think first quarter next year. Yeah, you want to talk about that we've got going on yes are we are we have announced the big project or Dale, but before that comes on well we're still.
Running a fuels refinery there were converting one of our hydrotreaters to be able to run soybean based oils to can to make our renewable diesel and that federal unit will produce about 9000 barrels a day at a very attractive capital efficiency on that project and that that sets us up to begin the.
Setting up our supply chains in the Rodado and our marketing changes on the other side of that for.
The renewable diesel out of Arbor day, or the next step will take that as the commercial agreement we have with rise who is building to renewable diesel it for.
Facilities, one in Reno, one in Las Vegas, where we will supply the feedstocks and take all of the.
Renewable diesel offtake.
And be able to put that into the California market. That's our next step forward.
In kind of way.
20, and 21, and then we would expect to have that permitting done sometime in 22 and begin the conversion of the road our refinery to eventually.
Have the largest renewable diesel facility in the world and make about 50000 barrels a day of renewable diesel feedstocks that are premise to be about 80% of the harder to two process feedstock. So thats used cooking oil fats oils creases towers.
From a variety of sources around the world and reduce its really uniquely positioned because a we sit in the California market, where there's a high demand for work well lower carbon intensity fuels and secondly, we have water access to the far east to bring in.
All of these difficult to.
Process renewable feedstocks.
So the second piece is that is a hydrocracking facility. We have two high pressure hydrocrackers, there that will be converted to both.
Process renewable feedstocks.
And very capital efficient at the end of the day, we will convert the facility and build the pre treatment facilities for total capital cost of about a dollar per gallon per year of capacity.
That's a 50% cheaper than anything else, we've seen announced and then some sometimes three times cheaper than some of the competing projects. We've seen enough. So we we feel really good that by 2024, we will be a major player in the renewable fuels in California, and other places in the United States I think just.
To highlight the $750 million to $800 million that that's one of the biggest projects we have in the portfolio at this time, so we're making a substantial investment there.
Thank you.
Yes.
Why not just from credit Suisse. Please go ahead your line is open.
Hi, guys, you mentioned about 80, plus central or CIA feedstocks, and 20% from most likely see a bean and canola.
Generally in the common market, what kind of discounts are these lower CDAI hoggard to processed feedstock getting.
Let's see is a silly I'd be nearly as I say I mean, I'll just trading at 32 cents per pound I laid out these how difficult process feedstocks trading at a discount so it'll be nice.
No I think manav, there's a fair amount of variance from region to region.
On the.
On the feedstocks and the transportation cost to get from point a to point B.
Scott I think the important thing is that we had the flexibility.
As we operate to pick the lowest cost feedstock in the market and similar to the high complexity refining where you've got a lot of flexibility on what feedstocks and what yields you have where.
We are building in with the pre treating capability that flexibility to take advantage of the the lowest cost most optimal feeds.
Feedstock in an order to produce to renewable diesel so.
Well I think well positioned in that regard.
Okay. A quick follow up is you initially mentioned this multiple storms that hit you book in chemicals as well as to refining Bob is that any kind of opportunity cost to lost out because of all these hurricanes or can you just give us the sequence of like which are the facilities that did get impacted by.
Subsequent hurricanes that hit the Gulf Coast.
Yes, I'll take a shot of that on the with the first one if you recall it seems like a long time ago now, but on August 20, Fiveth, we shut down the Lake Charles facility for Hurricane Laura and ended up being down all the whole month for September because of the power infrastructure in the General Lake Charles.
Most region that was essentially completely destroyed.
We did not start.
Start restarting that facility until early October and in fact, we didnt have full power back into the refinery to be able to operate as anything that we wanted to until October. The fifth. Unfortunately, then on October the nice Hurricane Delta came essentially right back up the same path and while it was a lower Intel.
City Storm, we still had to shut back down and essentially start over power.
Power infrastructure held up a little better in that timeframe. So by the middle of October we started restarting.
The Lake Charles facility.
So today, we're back up and running there.
But we've still got a few units up to start, but we will be market dictating the the rate, but we will be at everything that we want to be up will be up and running here within the next week or 10 days at Lake Charles and.
In Alliance, we shut down September 13 for Hurricane Sally.
Which was originally pointed right at.
Alliance, we got Lucky with that one and that of course moved off a little bit and we did not take a direct hit.
We chose to keep alliance down because we had some maintenance planned for October anyway in rather than restart and shut back down for that.
We just moved the maintenance backup.
Maybe fortuitously, maybe on in 2020 can you say being down as fortuitous.
But hurricane Zadar Zeta.
Came right through that area two nights ago, and so we were already down obviously kind of a.
And Didnt have shut back down for that one.
Power was out again in the in the area, we expect to get power back today or tomorrow to alliance, but we had pulled forward some.
Some work that we want to get done there that was difficult to do and future turnarounds and.
We anticipate continuing to execute that work.
Sorted through mid December and then position ourselves.
To be ready to restart alliance in the new year, assuming the market conditions are there and giving us the signal that we need to bring on more capacity, we have enough refining capacity.
In the Gulf Coast, obviously to cover all of our marketing needs right now and any commitments that we have to.
To our customers and we will as we gave guidance earlier, we'll let the market tell us what utilization ought to be in the first quarter.
And just a follow up on chemicals, So CP Chem took down several of their facilities on the Gulf coast in anticipation of those.
Those storm events, they were probably more fortunate in that they really were not impacted us. So everything is back up and running normal there.
Got the Blair from Tudor Pickering Holt. Please go ahead your line is open.
Hey, good morning, everyone.
Greg do you have an update on whether that potential fives.
Five cents PE increase for October is going through and do you expect to see the normal seasonal impact in PE. Later later in the quarter or do you think that low inventories could provide some support on pricing.
Okay, Tim answer that yes, it looks like at this point in time that that increase is going to get push.
There's been really nice run up to this point in time and advancing good we think it's more due to seasonality than it is anything else, which usually this time of year.
Seasonal effect in demand in the kids business.
Yes, I think the you know you thing about margins. So we were kind of 18 cents full chain margins in Q1 10 cents in Q2 90.
19 cents in Q3 on a high Hs marker margin basis and today. There are 28 29 cents there theyre above mid cycle and I think it's been driven by combination things. One is the demand has been fundamentally good across the globe, but we see it Asia Europe, we see it in North America strong strong demand.
And then theres been some impact in terms of the hurricane So at some point at one point there was about 20% of the US ethylene capacity was offline because of the hurricane Mora and so that's had some impact inventories have come down on the ethylene side. So that's really all I always positive for margins.
So I think our view is coming into the fourth quarter, we have kind of this seasonal weakness or or pause. If you will in terms of the petrochemical space, but we're we're relatively optimistic about petrochemicals for next year.
Sounds good and then just.
Turning to renewable diesel so thanks for the update on the feedstocks I wanted to ask about the permitting in California normally that's that's kind of a challenge.
Do you anticipate you know an easier route this time because of.
The nature of the facility could you just address that.
Yes, I think you said that you're correct. It is always difficult to permit anything in California and it. It is a very wrote process at the end of the day and there.
Our many steps that we have to go through the biggest permit that we have to get is a land use permit in contra Costa County, and that will require an environmental impact statement and go through all that work.
We took a very different approach as a company on this particular project in that we made sort of full court press.
With many stakeholders in the state of California, The day before we announced so we had multiple conversations in Sacramento.
Everywhere from Governor, new some softness to Cal EPA to car.
To local legislators to the local Contra Costa County Board of Supervisors, and I would say that we were met with great enthusiasm for this property across the board from those that are going to be responsible at the end of the day for actually permitting it in that in the meantime, the permit is in on its been deemed complete.
Hi, Contra Costa County, which really starts the process for them. So they will hire independent third party to do the environmental assessment of that and that is all beginning so we're we're there and ready to help support them through that.
We havent seen real.
Any opposition at this point to the project and I think as people are understanding more and more on.
The benefits of US doing this project as we mentioned the environmental benefits and Nox Sox and greenhouse gas reductions.
We think the permitting process will will flow through and add on it's kind of a normal timeline and look forward to getting that permit in early 2022.
Theresa Chen from Barclays. Please go ahead your line is open.
Hi.
Going back to some of the earlier comments on that.
Supply rationalization in the market and just thinking about the overall demand supply balance for refining capacity and how do you view the probability weighted.
Quantity.
On supply that is new supply that's coming into the market in the middle East and Asia.
Yes, so there's about a million barrels a day scheduled for 2020 highly.
Highly likely that some of that gets pushed out into.
2021.
We're seeing a slowdown in activity.
From a co that perspective and its impact on labor.
As well as capital cost reductions.
In the industry show.
I think those.
Barrels are going to get pushed out.
As as we look today there is not a real reason to rush any any of these projects into service.
Got it and.
Turning back to the West coast.
Thank you for all the color on the renewable diesel projects and your thoughts around that and I was curious to hear how you view the whole electrification theme.
Given the recently ordered.
I wondered I span from me since all the front office and benign.
Other states in the U.S. considering that.
Miller on orders as well as the legislation should do to Congress to mandate. It on the federal level and can you talk about.
Good news on these aspirations may be meeting ball of reality.
So I'll take a stab and then Bob can help me because he is pretty active in this area, but I think these are aspirationally goals and I think that.
Yes, I think the signposts, we're going to watch for is when billions of not trillions of dollars start point in infrastructure investments around distribution power generation et cetera that you could truly electrify the fleets. So.
No.
I'm, probably more bullish on low carbon fuel standard as we think about it moving from California, Oregon, and Washington State to maybe to the East coast and so I I think the more near term easier thing to do and then in terms of renewable.
Renewables that can lower carbon intensity those those make sense that you can earn good returns doing those projects and I think the electrification electrification is going to take a long time to get there yet I think we would agree with the AFPM ASCO statement out there that we would stand behind solitude and the governor Newsome doesn't actually have the.
It's already to do what his aspiration all executive order late played out and you just think about the logistics of batting ice in California, but Theres. These states around recalled, Arizona, Nevada, and Oregon that have car dealerships too so.
It's hard to understand how this actually becomes a reality when they're there really isn't enough electricity in California today for for base demand.
And Wong from Morgan Stanley. Please go ahead your line is open.
Hey, good morning team. Thanks for taking my questions. Good morning first one is.
As around morning, Jeff round.
Operator production limits being lifted in December once you get your sense.
What do you think that might have an impact on Canadian crude differentials and how it might.
You just shipped your feedstock sourcing strategy. Given you guys are one of the largest importers of the Canadian crude.
Hi, My name is Brian Hey on our Canadian crude.
Bill just a few few weeks ago it was.
It was 4.2 million barrels of pipeline capacity out of Canada, and it wasn't 4.2 million barrels of production with suncor issues and correct Polaris pipeline issues and now we're starting to see the production come back we're starting to see more production than pipeline capacity. So our view is over time and it will.
Take some time, we think that the differentials will start to widen out to variable rail rates, which we see about 13 50 offer W.T.I.s. So.
Thats good for US every dollar is about $100 million for some up 66. So we continue to watch that you could actually you've seen not the past few weeks the differentials were under $10 and now as of yesterday 10, 60, so they're already already starting to expand.
Great. Thanks for the color there.
Philip is maybe for Greg.
Thank you and your team has always had a longer perspective that the world and that often translates into how you run the business and I think in the past you.
I have guided us to think about Phillips 66, generating a mid cycle EBITDA of about $9 billion run.
Recognizing its at certain times, but just wanted to get your thoughts and maybe your degree of confidence that mid cycle level EBITDA generation is still reasonable and if it is how do we get back there as it were finding rationalization alone can it can it get back to us there. Thanks.
Yes, I think shorter term, we still got a little bit of inventory overhang. We've got to work through I mean, directionally inventories have been moved in the right way. So we feel relatively good about that but I think that.
We want to clean it up and for Q, We may get get a shot at it and one Q, but certainly we think as we approach the summer driving season.
In Twoq, you that that will have an opportunity to see margins more normalized.
And for US So we're talking about CV Kim essentially the marker margin is above mid cycle today, our midstream business is going to continue to perform well our marketing specialty businesses has been a very consistent 1416 kind of billion EBIT da business. So the real question Mark on on the PS export coal.
His wonder when does refining get back to mid cycle conditions, and so we probably got a shot at doing that kind of the mid year next year.
So Jeff or Bob you want anything to that yeah, I would just add that at CP Chem. The addition of US Gulf Coast. One came at a time when margins were declining and so the the earnings power of that facility is really not been shown in a mid cycle margin environment.
So I think that will be supportive of higher contributions from CP Chem.
We have reached the end of today's call I will now turn the call back over to Jeff.
Thank you for your interest in Phillips 66, before I wrap up I'd like to thank Brent Shaw for his significant contributions to the Investor Relations group rents been promoted to another role at Phillips 66, and I'd like to welcome Shannon hauling to the IR team.
Thank you very much for your time today and please call Shannon or me with any questions.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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